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Cablegate: South Africa Economic News Weekly Newsletter

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RUCPCIM/CIMS NTDB WASHDC
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TAGS: ECON EFIN EINV ETRD EMIN EPET ENRG BEXP
KTDB, SENV, PGOV, SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER
JANUARY 25, 2008 ISSUE

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1. (U) Summary. This is Volume 8, issue 4 of U.S.
Embassy Pretoria's South Africa Economic News Weekly
Newsletter.

Topics of this week's newsletter are:
- Turmoil in Markets Threatens Growth
- SAG Inflation Targeting Policy Questioned
- Fixed-Investment Outlook Strong for 2008
- Saudi-based Group to Invest in Telkom SA
- Freight Transport Rate Hikes Outpace Inflation
- BHP Billiton's Oil Search Stymied
- China's Gold Output Surpasses South Africa
- Mining Industry Considers Backup Power Supplies
- Power Shortages Impact Mining Expansion
- Civil Aviation Authority Revises Recruitment
Strategy
End Summary.

-----------------------------------
Turmoil in Markets Threatens Growth
-----------------------------------

2. (U) Turmoil in currency and equities markets has
complicated the job of the South African Reserve Bank
when it considers next week whether to change the
interest rate policy. While a slide in the Rand is
set to push inflation up, a rout on the Johannesburg
Stock Exchange and a deepening power crisis threaten
to curb economic growth. "There are more reasons
today for the Reserve Bank to consider leaving
interest rates on hold, although there has been
nothing but bad news in terms of inflation," said ABSA
Capital chief economist Jeff Gable, adding, "The
fundamental question for the Bank now is how to
balance a miserable inflation message with growing
signs of a meaningful slowing in consumer demand and
concern over the broader economy." The Rand had
plunged more than 8% in the past week alone, an
ominous sign of inflation to come, but recovered
partially after the U.S. Federal Reserve cut interest
rates by 75- basis-points on January 22. (Business
Day, January 23, 2008)

-----------------------------------------
SAG Inflation Targeting Policy Questioned
-----------------------------------------

3. (U) SACP Deputy General Secretary and newly elected
National Working Committee (NWC) member Jeremy Cronin
stated that inflation targeting, a key government
anti-inflation policy, "is wrong". Cronin added that
there was a feeling in the tripartite alliance that
South Africa should follow the example of South Korea,
which had "manipulated" interest rates according to
industrial policy and "strategic objectives". Many
analysts believe that this would be the wrong time to
question the government's anti-inflation efforts, as
interest rates have been above the Department of
Treasury's 3-6% inflation targeting band for nine
consecutive months. It would also send the wrong
signal to bond and equity markets, which will be
needed to continue to finance South Africa's large and
growing current account deficit, and would have a
negative effect on the country's exchange rate and
sovereign credit rating. However, other analysts
believe that the inflation targeting band of 3-6
percent has caused the South African Reserve Bank to
hike interest rates unduly in the face of inflation
fueled by international fuel and food prices, rather
than demand pressures. (Business Report, January 15,
2008)

----------------------------------------
Fixed-Investment Outlook Strong for 2008
----------------------------------------
Q----------------------------------------

4. (U) First National Bank Chief Economist Cees
Bruggemans said electricity, transport, communications
and mining are expected to be the main drivers of real

PRETORIA 00000162 002.2 OF 005


fixed-investment growth in 2008. He expected fixed-
investment growth of 13%-16% in 2008. Bruggemans said
public corporations would show the fastest increases,
but government and private business should continue to
expand steadily as well. He added that the fixed
investment to gross domestic product (GDP) ratio is
expected to top 25% by 2010. According to the
December 2007 South African Reserve Bank quarterly
bulletin, real fixed-investment spending rose 16% in
the first three quarters of 2007 and reached 21.2% of
GDP in the third quarter. Public corporations
increased their real fixed investment 32% y/y in 2007.
Bruggemans indicated that a "bulk of this effort went
into infrastructure creation," with more than 50% of
investment spending focused on construction, 35% on
machinery and equipment, 10% on transport equipment
and only 2% on nonresidential buildings. In contrast,
government investment growth was much slower, with 13%
y/y fixed investment growth in 2007, but this was a
great improvement over 2006, when a decline of 0.5%
y/y occurred. (Business Day, January 22, 2008)

----------------------------------------
Saudi-based Group to Invest in Telkom SA
----------------------------------------

5. (U) Saudi-based Oger Telecom plans to buy into
South African fixed-line operator Telkom SA. Oger CEO
Paul Doany told reporters it will use some of the $2.6
billion it earned from the sale of a stake in Saudi
Telecom to invest in Telkom SA. Oger already has a
majority stake in unlisted Cell C, South Africa's
third-largest mobile operator. Doany did not specify
the size of the offer but said about $830 million will
be paid to shareholders as a dividend. Telkom SA
issued a statement stating it would consider the
"nonbinding expression of interest" from Oger Telecom,
along with other alternative options to enhance its
converged fixed and mobile services. The bid comes in
the wake of aborted talks for Telkom SA to sell part
of its 50% stake in Vodacom, South Africa's largest
mobile operator, to the U.K.'s Vodafone, which already
owns the other half. That was cancelled when Telkom
failed to agree a tie-up with MTN, which would have
filled the gap created by selling its Vodacom mobile
assets. MTN is the largest mobile operator in sub-
Saharan Africa. (Business Day, January 23, 2008)

--------------------------------------------- -
Freight Transport Rate Hikes Outpace Inflation
--------------------------------------------- -

6. (U) Transnet Freight Rail is the latest state
utility to announce above-inflation tariff increases.
The new freight tariffs will take effect from April
2008 increasing freight rail prices by 16.5%-22%. The
price on a consignment of 10 wagons or more will go up
16.5% y/y, while the increase for consignments of
fewer than 10 wagons will be 19.5% y/y. Transnet
Freight Rail also announced that charges on some
routes would go up 22% y/y, irrespective of
consignment sizes. While the utility did not specify
which routes, Chamber of Mining Executive Director
Jannie de Villiers said they were likely to be those
serving rural and agricultural areas, which means the
cost of shipping agricultural products to market would
Qcost of shipping agricultural products to market would
increase significantly and push up food prices.
Transnet Freight Rail wants to increase its market
share from about 10% to 30% in the next five years. A
large chunk of the Transnet group's capital spending
of R78 billion ($11 billion) over the next five years
will go to upgrading rail operations. (Business Day,
January 18, 2008)

---------------------------------
BHP Billiton's Oil Search Stymied
---------------------------------

7. (U) BHP Billiton, the operator of two potential

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petroleum-producing blocks off South Africa's west
coast, has reached an impasse with the government over
the conversion of its exploration leases to new-order
mining rights. A key obstacle is related to the
Department of Mining and Energy's (DME) insistence
that local courts arbitrate in disputes, rather than
international arbitration courts as expected by
international oil companies. BHP Billiton's old-order
sub-leases are believed to include "stability clauses"
and access to international arbitration and the
government appears to be using the conversion
requirement to remove these rights. Another oil
producer, U.S.-based Pioneer Natural Resources, said
other operators in the local petroleum exploration
sector faced similar problems, but "Pioneer had
reached an accommodation to make our situation work."
Other operators have greater incentive than BHP to
agree to the government's terms because they have
already invested significantly in drilling. Forest
International, the U.S.-based operator of the Ibhubesi
gas field off the west coast, is expected to have new-
order production rights for its acreage issued this
year. A Business Report editorial opined that the
"state's stubborn petroleum policy may need oiling."
It noted that BHP Billiton was holding off on
exploration apparently due to fears of uncertainty
over royalties, as well as rights to international
arbitration. The editorial concludes: "Given the
uncertain environment and the fact that South Africa's
undersea geology is not as enticing as Angola's, it is
perhaps not surprising that no new players have
invested in our off-shore petroleum reserves in the
last five years." (Business Report, January 16, 2008)

------------------------------------------
China's Gold Output Surpasses South Africa
------------------------------------------

8. (U) China overtook South Africa as the world's
largest gold producer in 2007, according to the Gold
Survey 2007 from the precious metals consultancy GFMS.
South Africa had held the accolade since 1905, but its
output has been in steady decline since it reached a
peak of 1,000 tons in 1970. China's move to the top
spot comes after strong, continued growth in recent
years, while gold production in South Africa has
continued to decline. South Africa's declining
production means it is losing out on potential foreign
earnings and employment opportunities as the gold
price has picked up in the past few years, touching a
record of $914/oz this week. Latest data from
Statistics South Africa for the year to November
showed South Africa's gold production fell 12.7%
compared with the same period in 2006 because of
safety-related mine shaft closures. GFMS reported
that South Africa's production for the whole of 2007
declined 8.1% y/y to 272 tons while China's increased
12% y/y to 276 tons. GFMS said gold production was
affected by the increasingly difficult operating
environment in South Africa. Competition for
consumables, labor and key plant items hampered
project development. Globally, gold production fell
1%, but GFMS forecast it would grow about 2% in the
first half of 2008. GFMS estimated that gold prices
Qfirst half of 2008. GFMS estimated that gold prices
could average $840/oz in the first half of 2008 and
could be even higher in the second half. (Business
Day, January 18, 2008 and Mining Weekly, January 17,
2008)

--------------------------------------------- --
Mining Industry Considers Backup Power Supplies
--------------------------------------------- --

9. (U) The South African mining industry has received
assurances from Eskom for priority service during
power shortages, but is struggling to reduce power
consumption. The companies are all "load-shedding"
but there are certain activities, such as ventilation
and transporting workers and equipment, for which

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there is limited room for further reductions due to
safety concerns. Although producers have not yet had
to incur any additional costs for backup power, some
are considering options for backup supplies. However,
one producer, Simmer & Jack, said the cost of
traditional backup options was prohibitive. For
example, operating standby diesel generators costs
about 6 to 10 times as much as power supplied by
Eskom, which is why they are used only in emergencies.
Harmony Gold Mining, which uses about 460 megavolt
amperes (MVA) at peak periods, said it was in
partnership with another company to pursue an Eskom
co-generation project. This would entail building
seven generating stations at Harmony's operations with
a total capacity of 300 MVA. Gold Fields was buying
additional emergency capacity to supply its existing
backup, it said. AngloGold Ashanti installed backup
power units 20 years ago, which could evacuate a peak
shift of underground workers. (Business Day, January
22, 2008)

---------------------------------------
Power Shortages Impact Mining Expansion
---------------------------------------

10. (U) South Africa's main gold and platinum mines
have secured enough power to keep their expansion
projects moving for the next two or three years, but
beyond 2010 they can not be certain of their
electricity supplies. Gold Fields, Harmony Gold
Mining and Simmer & Jack are extending existing
operations or reopening mines where the electricity
infrastructure is already in place, so they are not
shelving any announced capital projects. However,
there is concern that "Eskom cannot provide quotations
for the increased capacity required beyond 2010 until
they finalize their policy on allocating new capacity
in this period of shortage." A Simmer & Jack
spokeswoman said its projects at Buffelsfontein,
Hartbeestfontein and Ezulwini were in areas that
historically had been very large consumers of
electricity. An AngloGold Ashanti spokeswoman
reported: "The big projects that require additional
power are only scheduled to come into full production
after 2010. This is not due to the energy situation,
but they have long lead times for sinking operations."
A BHP Billiton spokeswoman said the group could not
expand its Hillside and Mozal smelters unless it could
secure enough power at internationally competitive
prices. Anglo Platinum said its current expansion
projects will increase its electricity consumption by
50% by 2013, but did not say it would defer any of its
capital projects. Platinum producer Lonmin announced
that electricity problems would not alter its
expansion plans, including the development of Akanani
after 2012. (Business Day, January 22, 2008)

--------------------------------------------- --------
Civil Aviation Authority Revises Recruitment Strategy
--------------------------------------------- --------

11. (U) Civil Aviation Authority (CAA)
CEO/Commissioner Colin Jordaan told the press that CAA
is revising its strategy to recruit additional
aviation inspectors. Jordaan originally hoped to
recruit about 40 inspectors from a group of
experienced pilots that South African Airlines (SAA)
Qexperienced pilots that South African Airlines (SAA)
was planning to retrench. However, many of these SAA
pilots have received and accepted offers from
expanding airlines in the Middle East. To respond to
short-term needs, Jordaan is planning instead on
recruiting experienced pilots who are close to
retirement from other South African local airlines,
including Nationwide and British Airways/Comair.
Jordaan expressed hope that a new South African
regulation that reduces the age at which student
licenses are granted from 18 to 16 years will increase
the pool of trained pilots in the long-term. He
reported that similar reductions have been in place in

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many other countries and it is seen to be a safe
measure. Both SAA and British Airways/Comair offer
training programs for a limited number of student
pilots. (Business Report, January 18, 2008)

BOST

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